The more competitive a market gets, the more businesses need to innovate to grab customers’ attention. The UK’s mortgage market is certainly ultra-competitive, with over 100 lenders offering some 12,000 products between them. Yet there’s been no truly new product since offset mortgages appeared more than 15 years ago.
Meanwhile, sustainability is becoming a bigger feature of day-to-day life, driven by government regulation as well as growing public consciousness. People are becoming more aware of climate change in their choices, whether it’s electric cars on their drives, insulation in their lofts or solar panels on their roofs. For lenders looking for new ways to generate business, the key could be to connect this new desire to the mortgages they offer, creating sustainability mortgages. Some of the opportunities for such ‘green loans’ are clear:
Lending is all about risk, so let’s start there. Banks and building societies hold the deeds to many of the UK’s homes most at risk of flooding. It’s a significant and growing risk to the banks, and their customers. Recent data indicates 10 per cent of homes built since 2013 are on land at the highest risk of flooding. So, why not analyse the mortgage book and offer innovative mortgages that let customers invest in flood defences to protect their homes? The Flood Protection Mortgage is born. With measures like drainage ditches and retaining walls, lenders protect their interests, as well as their customers’ homes. The customer spreads the cost of the protection, making it more feasible, and the home’s value goes up too.
A big driver for changing behaviours around sustainability is regulation. We’ve counted more than 40 new or emerging government regulations related to climate change. Take electric vehicles, for instance. Demand for them is increasing, but there aren’t enough charging points to support it. So, mortgage lenders’ propositions could include either installing fast chargers as part of the home move, or partnerships with utility companies like Octopus Energy, whose scheme uses electric vehicles as storage to offset energy bills. NatWest has already started to capitalise on this opportunity, partnering with Octopus to offer discounted EV charging points. To go further, lenders could offer mortgage packages with vehicle-share schemes for flats that don’t have space for car parking or charging.
Banks could also support customers who want to ‘green’ their homes, boosting the quality of the home and cutting its impact on the planet by offering low-cost, bolt-on funding to install efficient heating systems or double glazing. With a ‘Go Green’ mortgage proposition, this could happen as the new owner moves into their home. The Government’s Green Homes grant scheme, which offers up to £5,000 towards measures, like insulation or low-carbon heating, seems to be struggling with the administrative burden of managing £1.5 billion of funding. Perhaps banks and building societies could do this more effectively, delivering real societal value while improving the quality of their mortgage books.
Another opportunity for lenders is to support owners of rural buy-to-let properties who face substantial bills as they try to keep up with the improved Energy Performance Certificate ratings for rental properties. Recent research suggests a rural landlord would need to raise the rent by six per cent a year for 15 years to cover £10,000 spending on improving their EPC rating. The situation would seem tailor-made for a new sustainability-based offering from lenders.
The social dimension to sustainability matters just as much as the environmental side. With property prices fast out-running people’s ability to afford a house – especially for first-time buyers – many are having to put off buying a home until well into later life, when they can afford hefty deposits. Lenders could have a role in helping ‘generation rent’, though the biggest lenders haven’t yet played a part in the government’s Help to Buy Equity Loan scheme, due to end in 2023. A new scheme, running in parallel from April 2021, will see the government underwrite loans for buyers who can raise a five per cent deposit. It remains to be seen what effect this will have on people’s ability to get on the property ladder. Lenders and regulators must work together to fundamentally rethink affordability, more closely aligning with rental costs, which are more often higher than mortgage repayments.
Lenders have been supporting social housing, together with some investment banks, by financing housing associations’ efforts to build affordable homes. But the timing seems right for innovation in the mortgage market itself.
With 92% of consumers trying to live more sustainably and 70% willing to pay more for products and services that protect the environment, consumers are increasingly likely to favour ethical or purpose-led brands. Sustainability-focused mortgages are an unrivalled opportunity in this space. What better time for lenders to show they’re capable of listening and understanding to drive real customer-centred innovation?